I use this blog to gather information and thoughts about invention and innovation, the subjects I've been teaching at Stanford University Continuing Studies Program since 2005.
The current course is Principles of Invention and Innovation (Summer '17).
Our book "Scalable Innovation" is now available on Amazon http://www.amazon.com/Scalable-Innovation-Inventors-Entrepreneurs-Professionals/dp/1466590971/

Saturday, July 14, 2012

(BN) JPMorgan’s Wrong-Way Trade Loses $5.8 Billion: Timeline

JPMorgan's Wrong-Way Trade Loses $5.8 Billion: Timeline

July 14 (Bloomberg) -- JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon disclosed yesterday that losses at the bank's chief investment office totaled $5.8 billion and may reach $7.5 billion. Here's a chronology of events leading to the setback and the aftermath.

Some dates are approximate and are subject to revision as more information becomes available.
2006---------------------------------------------------------
Jan. 18: Dimon tells investors, "We are going to build our businesses, and therefore, over time, we'll be taking more aggregate risk." Dimon says a key measure of potential trading losses called value-at-risk, or VaR, is "a very bad number if you think it actually represents risk." The figure probably will climb, according to Dimon.
Date unknown: Achilles Macris joins JPMorgan, becomes leader of strategy that builds credit risk in CIO. The unit is run by Chief Investment Officer Ina Drew, who reports to Dimon, and includes Bruno Iksil, whose trades play a central role in adding risk to the CIO's operations.
2007---------------------------------------------------------
Date unknown: CIO bets against an index of subprime mortgage bonds and earns about $1 billion.
Dec. 31: Securities held in JPMorgan's CIO and treasury reported at $76 billion. Corporate division, which includes CIO and treasury results, has net loss of $150 million for the year.
2008---------------------------------------------------------
Mar. 16: Assets managed by CIO expand as JPMorgan agrees to buy Bear Stearns Cos.
Sept. 25: Assets managed by CIO increase again as JPMorgan buys Washington Mutual.
November: Macris's group begins placing bigger bets, becoming the largest buyer in some markets. A CIO trader buys about $1.1 billion of AAA-rated portions of collateralized loan obligations in November-December.
Dec. 31: Corporate division finishes year with $1.5 billion profit.
2009----------------------------------------------------------
Date unknown: In the months after the financial crisis, top executives raise concerns with Dimon that the CIO's risk management is inadequate, according to the two executives familiar with the conversations. William Winters and Steve Black, co-heads of the investment bank, seek more information on the unit's changing risk profile. Dimon responds that the situation is under control. (The company says executives never complained about a specific risk in the CIO's office. For a more complete account, click here.)
April 16: An analyst asks about the rise in JPMorgan's risk gauge during quarterly earnings call. "I don't pay that much attention to VaR," Dimon says. "A lot of that is just hedge positions."
Sept. 29: Winters ousted as co-CEO of investment bank in shakeup. Jes Staley named CEO of investment bank, Black named executive chairman.
Dec. 31: Corporate division ends year with $3.7 billion profit.
2010---------------------------------------------------------
Jan. 15: "I wouldn't focus too much on trading VaR," Dimon tells analysts on an earnings conference call. "It's really not an accurate measure of risk."
April 14: Dimon says on quarterly call that VaR is "an inadequate measure of most things."
Dec. 31: Macris's team books $5 billion annual profit, more than a quarter of bank's net income. CIO finishes year with average value at risk of $57 million, down from $61 million in 2010.
2011---------------------------------------------------------
April 4: Office of the Comptroller of the Currency warns banks to scrutinize computer models for VaR for possible flaws, citing the risk of financial loss and damage to reputation.
Nov. 29: One of Iksil's concentrated bets on an insurance-like product produces a large profit less than a month before expiration as the parent of American Airlines goes bankrupt.
Dec. 31: Iksil records profit of more than $100 million for the year. He's given more leeway than other traders because of outsized gains in prior years.
2012----------------------------------------------------------
January: JPMorgan changes VaR model for chief investment office in the middle of the month. By the end of the quarter, the new measure shows risk averaging about half the level that the old model would have indicated.
Jan. 12: John Hogan becomes chief risk officer, replacing Barry Zubrow, who moves to head of regulatory policy.
Feb. 13: Hogan announces new team, with Irvin Goldman as new chief risk officer for CIO.
March 31: Average value at risk falls by $2 million to $67 million during the first quarter, according to the new, flawed formula.
April 5: Bloomberg News is first to report Iksil had roiled markets with CIO positions so large that they were distorting prices. The Wall Street Journal follows with a report that hedge funds are taking positions to bet against JPMorgan. The bank says the CIO hedges structural risks to bring assets and liabilities "into better alignment."
April 8: JPMorgan, responding to speculation that it's engaging in proprietary trading, says the CIO "is not focused on short- term profits."
April 10: The Wall Street Journal reports that Iksil has stopped making trades. A spokesman says the company believes its risk is now effectively balanced.
April 13: Bloomberg reports that the CIO's trading positions are so big that they probably can't be unwound without losing money or disrupting markets, and that Dimon supervised a shift in the CIO's office in the pasts five years toward making a profit rather than protecting the bank from risk. In a quarterly earnings call, Dimon calls the matter "a complete tempest in a teapot." JPMorgan posts earnings and distributes VaR data, which is later withdrawn.
May 10: Dimon announces "egregious" CIO loss of about $2 billion and says it may increase by $1 billion in the months ahead. Bank reverts to old VaR formula, which shows average daily trading risk at $129 million, almost double what had been reported. The bank's filing shows VaR at $186 million on last day of March. Dimon says the trading blunder may blunt efforts to soften pending U.S. regulations that would restrict trading.
May 11: JPMorgan stock falls 9.3 percent, the most in nine months. Federal Reserve, Securities and Exchange Commission, Commodity Futures Trading Commission start reviews of trading.
May 14: Ina Drew retires as head of CIO. Matt Zames, her replacement, shakes up the unit's leadership. Macris will leave the firm, Bloomberg reports. Office of the Comptroller of the Currency says it's examining losses and risk management. JPMorgan examines whether CIO employees sought to hide risks, a person tells Bloomberg.
May 15: Treasury Secretary Timothy F. Geithner calls CIO trading loss a "pretty significant risk-management failure." Department of Justice and Federal Bureau of Investigation open inquiries.
May 17: The Wall Street Journal describes how Dimon learned of the trading losses and reports that JPMorgan's losses may total $5 billion.
May 21: JPMorgan halts stock buybacks. Stock price stands 20 percent below levels that prevailed before CIO loss was announced. Dimon says there's no outcome that would be a "disaster" for the bank. "It's ugly, but it's going to be boxed and eventually it'll be gone," the CEO says.
May 22: SEC Chairman Mary Schapiro says bank's changes in VaR are being scrutinized.
May 25: Bloomberg reports board risk committee lacks members with financial risk experience. Wall Street Journal later reports risk panel may add members. Senate Banking Committee asks Dimon to testify at June hearing.
May 31: Bloomberg reports CIO valued some of its trades at prices that differed from those at its investment bank.
June 5: Federal Reserve is providing oversight to JPMorgan's "efforts to manage and de-risk the portfolio," Fed Governor Daniel Tarullo says.
June 6: Comptroller of the Currency Thomas J. Curry tells Senate the losses reflect "inadequate risk management" in the CIO and the agency is checking for similar gaps elsewhere in the bank.
June 13: Dimon tells Senate Banking Committee that executives and risk-monitoring systems failed to adequately police threats in the CIO's derivatives portfolio. The division wasn't subjected to the same scrutiny as other businesses, and managers there deviated from control procedures, even after triggers on risk limits were breached, he said.
June 19: Dimon testifies at House Financial Services Committee and says that new VaR model, while not causing the loss, "may have aggravated what happened."
July 13: JPMorgan reports second-quarter results, including CIO's updated loss and restatement of first-quarter profit. Bank ousts managers responsible and says it will claw back pay after internal probe finds traders may have intentionally tried to hide losses. Bank accepts offer by Drew to return two years of compensation; Goldman resigns. Dimon says CIO's synthetic credit trading is shut down and most positions transferred to investment bank.